When Kiersty Lombar was shopping for health insurance for the
seven employees of her year-old online coffee and gourmet-foods
company, she faced two challenges. "We had limited funding,
yet we needed a competitive benefit package to recruit
people," she recalls. Lombar, 27, worked with an online
insurance broker to find the right plan. She finally settled on a
Preferred Provider Organization (PPO), a form of managed care that
offers more freedom and a wider range of choices than the
traditional health maintenance organizations (HMOs).

Today, Lombar's company, The Perk.Com, offers generous
health-care benefits. The Austin, Texas-based company pays 100
percent of its employees' costs and 60 percent for spouses.
"It's important for us to take care of our
employees," reasons Lombar. "We see this as a recruiting
and retention tool. Even though we felt like we were at the mercy
of the insurance companies, we decided it was something we
couldn't cut back on."

To offset the cost of health insurance, The Perk.Com keeps tight
control on salaries and other overhead. No fancy offices for this
Internet start-up. "We don't have a whole lot of beautiful
furniture in our offices," says Lombar. "Health coverage
is more important to us."

Ellen Paris is Entrepreneur's "Management
Smarts" columnist.

Stiff Competition

Lombar's dilemma is shared by millions of America's
entrepreneurs, who are wrestling with one of the tightest job
markets in years and double-digit annual health-care cost increases
this year.

Finding and keeping good employees these days means offering
plenty of competitive benefits, something small employers
historically haven't had to do. "Most small businesses I
represent feel helpless," observes Keith Rosenbaum, an
attorney specializing in health care at Berger, Kahn, Shafton,
Moss, Figler, Simon & Gladstone in Irvine, California.
"They see the health-care benefit as required because they
can't attract good workers without it. It's like high-tech
companies not offering stock options. The health benefit has become
just as important in attracting a talent pool."

The pressure for small employers to offer health-care benefits
is increasing. An emerging trend as the labor market continues to
tighten: Low-wage hourly workers, the largest group of uninsured,
are now being offered health-care benefits by employers ranging
from day-care providers to restaurant owners.

Nearly everyone wants and expects health-care benefits today,
says Randy Myer, who teaches entrepreneurial policy at New York
City's Pace University. "Unlike other benefits, [health
insurance] is attractive to many workers because it crosses the age
and gender spectrums."

Myer, 52, who founded and still owns shares in Norwalk,
Connecticut-based Best Friends Pet Care, a national pet-care
company, offered health-care coverage to his hourly workers to
reduce turnover and to help in recruiting. It worked. "Many
employees said they stayed with us because of the health-care
coverage," he says.

If you're forced to shift a greater portion of the premium
costs to your employees, it's better to offer some coverage
than no coverage, say experts. "Even if employees have to pay
a large portion of the premium, it will still be cheaper for them
than individual coverage," advises Don Gasparro, managing
director of Apex Management Group, a health-care consulting firm in
Princeton, New Jersey.

But merely offering a health-care plan may not be enough in
today's especially competitive job market. "Your plan has
to be competitive with other employers, even much larger
ones," Gasparro adds. "You have to see what kind of
provider network is around your office and your employees'
homes so your people can use it." Matching your particular
employees' specific needs with a plan's benefits will save
you time and money and also help your employees get the most out of
a plan.

Bigger Is Better

Finding a health plan that meets your employees' needs is
only the first step. You may also need to offer some of the bigger
and better benefits larger companies provide, because they're
often vying for the same workers. But, of course, large companies
enjoy a significant cost advantage when it comes to health-care
benefits, making for a less than even playing field.

The Health Research and Educational Trust says health-care costs
for larger employers rose 4 percent between spring 1998 and spring
1999. "Smaller employers faced a very different
experience," says Jon Gabel, vice president of the
organization. The costs for small companies rose about twice as
fast. "It's not that employees of small employers were
sicker," explains Gabel. "Many large employers
self-insure, while small ones have to purchase their insurance from
health insurance companies."

Larger cost increases are on the horizon. This year health-care
premiums are expected to rise 12 to
20 percent for smaller employers and 8 to 14 percent for larger
ones, according to Matt Quade, a vice president at
employee-benefits provider AON Consulting's Bethesda, Maryland,
office.

What's behind it all? "All the [managed care] companies
were fighting for market share throughout the nineties by
underpricing their products. Now it's catch-up time," says
Gabel. "The small employer is the one who is paying for
it."

In other words, the lower-priced products many managed-care
companies came into new markets with have been hurting their bottom
lines in recent years. They now see from experience how much the
real costs are. According to Weiss Ratings Inc., over half the
country's HMOs lost money in 1998-and those combined losses
approached half a billion dollars.

Small employers have few options and little purchasing power
when it comes to buying their companies' health-care coverage.
"Rising costs hit small employers right between the eyes. They
have no control when rates go up, and there's little they can
do about it," says Patricia Halo, author of Managing Health
Benefits in Small & Mid-Sized Organizations (Amacom),
president of Halo Associates and founder of the Wellness Institute
in New York City, which provides benefits consulting services and
work-site wellness programs. One sick employee in a small work
force can wreak havoc on the group's rates. "Carriers look
at the track record of small groups very carefully," Halo
adds.

Another issue: Several states have enacted legislation that
makes it illegal to deny a group member coverage. While this has
helped people obtain coverage who might have been rejected before,
it's added another cost factor to the mix for business owners.
"Since the states got involved in legislating health insurance
in the last five years, we've seen many carriers pulling out of
the small-group market," explains Edith Livingstone, a vice
president at AON Consulting. And typically, less choice means
higher prices.

Another detail adding to the consistently growing costs are
state mandates such as those requiring infertility treatments to be
part of health plans. That means an employer whose work force has
little or no use for certain costly treatments must still provide
them. "Small businesses are the ones underwriting state
mandates. They get socked with paying the additional costs of each
new mandated state benefit," says Richard Coorsh of the Health
Insurance Association of America, an industry trade association
whose members include 290 health insurance carriers. Because many
large companies self-insure and don't buy coverage in the
standard marketplace, they are largely exempt from these state
mandates.

Prescriptive Measures

No question about it, small employers are in a tough spot. But
don't despair. "No matter what you hear, small employers
are not powerless; they do have options," stresses Halo. Those
options include reducing benefits, shifting more of the premium
cost to your employees, requiring employees to pay higher
co-payments when they visit a doctor, switching from a PPO to an
HMO, and covering only employees rather than including family
members.

One area ripe for possible savings is prescription drug
coverage. In recent years, drugs as treatment have been winning out
over more costly invasive procedures. So it's no surprise the
cost of prescription drugs has risen rapidly, with insurance
carriers passing those cost increases on to employers. Over the
last several years, prescription-drug-plan premiums have risen as
much as 50 percent, says Ivy Silver, an employee benefits broker in
Jenkintown, Pennsylvania.

To offset the cost increases of drug coverage, employers are now
asking employees to pay larger co-payments at the pharmacy, says
Silver. "Instead of paying $5 per prescription, maybe
they're paying $20. That will save some money on your monthly
premium," he says.

Silver suggests a "take and give" strategy. If you
feel you need to take away a benefit, give back a small one.
"For example," says Silver, "if you increase an
employee's co-payment, you can increase the vision-care benefit
to maybe 70 cents a month per employee."

A trend in the prescription drug area is for small employers to
go with a drug card that requires a $5 co-payment for generic
drugs, a $20 co-payment for name brands and a $35 co-payment for
any drug not on an approved list. "Patients with
prescription-drug plans were pressuring their doctors to write them
prescriptions for certain brand-name drugs," explains Silver.
"They go into the doc's office saying, 'I only want
[that brand-name drug], it's the best.' They don't have
any idea of the specific differences between the drugs." In
the past, says Silver, drug companies marketed almost exclusively
to medical professionals, but today, with omnipresent, name-brand
drugs advertising in print and on the airwaves, people regularly
demand the name brands-and some doctors are giving them what they
want, regardless of whether it's cost-effective or not. The
drug card's purpose is to curtail that practice.

Meanwhile, the health insurance industry is bringing a variety
of new products to market aimed at addressing problems faced by
small employers. Aetna U.S. Health Care, for example, introduced
its Affordable Health Choices last summer. This plan doesn't
have the comprehensive coverage of more expensive plans. "Our
intent was to put something into the marketplace to get the
attention of small employers, especially ones who had not offered
anything before," explains Mike Cardillo, Aetna U.S. Health
Care's president.

WellPoint Health Networks, one of the country's largest
health-care companies, now offers two group products for small
busineses, a Premier plan for businesses offering rich benefits,
and an Employee Elect plan for more affordable, employee-selected
coverage. "We need to do everything possible to make plans
affordable so employers can provide benefits in a price range they
can afford," says David Ludwig, a WellPoint senior vice
president.

Wisely managing your health-care costs may mean making tough
choices in other areas, such as compensation. "I think, over
time, we won't see wages grow as fast as they otherwise would
because of health-care costs," says Paul Fronstin, senior
research associate at the Employee Benefit Research Institute.

It's also important to review your health plan
regularly-before you get that notice of a premium increase. Halo
advises clients to "look five to six months ahead and
anticipate cost increases so you're not surprised. You need to
put the idea of rising health-care costs into the mix of your
overall compensation. If you do your employee reviews and give 10
to 20 percent increases and then a few months later get stuck with
a big increase in your health-care coverage, it's a double
whammy."

Capitol Intervention

Health-care costs and insurance coverage have garnered lots of
attention on Capitol Hill in recent years. The best-known and most
far-reaching piece of legislation is the so-called Patient's
Rights Bill. This bill includes a provision allowing the insured
the right to sue both his or her group health plan and, by
extension, his or her employer. This issue is a political football,
and no one knows what, if any, bill will ultimately be enacted. At
press time, House and Senate bills were on hold.

The liability issue has the health insurance industry clearly
worried. If enacted, many in the insurance industry fear it would
trigger an explosion of litigation. Predicts health-care attorney
Keith Rosenbaum: "Suing your HMO will be the next big wave in
liability lawsuits. The trial lawyers will be lining up to sue
insurance companies." Many industry observers feel that
patient-rights legislation could have the unintended consequence of
pushing up the number of uninsured Americans because employers will
simply not be able to afford health-care coverage on account of the
liability exposure. Last fall, the U.S. Chamber of Commerce
surveyed 769 companies on the topic and found that 25 percent would
terminate their health insurance coverage if the right to sue was
enacted.

Expect to hear lots of talk about health-care access and
containing costs during this election year. No matter what Congress
passes, keep your eyes and ears open-it will impact your
business.